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Shale and OPEC cuts challenge Middle Eastern tanker owners

Mon 31 Jul 2017 by Barry Luthwaite

Shale and OPEC cuts challenge Middle Eastern tanker owners
Bahri's agreement with Shell took the market by surprise

Mergers and partial acquition of fleets has been the hallmark of business in the Middle East in the first half of 2017

Middle East owners and companies associated with the oil industry are facing major challenges. New markets and especially shale oil developments in the US now provide significant competition. The worst of the offshore slump has passed, and it is noticeable that production has restarted on offshore fields. One of the steadily growing industries in the transport of oil is offshore terminal loading.

OPEC’s decision to cut production at the start of this year produced little movement in oil prices, which remain low. The result is consolidation and steady expansion of fleets in the form of high-specification newbuildings. Alliances with oil majors are a focus, but this could interfere with free trade and hit smaller tanker owners. Developments in recent months have left no doubt that major VLCC owners have made their moves for dominant positions in fleet and pooling strengths with the undisguised aim of hurting smaller owners that lack the financial muscle to compete. The buzz of mergers and partial acquisition of fleets was a strong feature of the first half of 2017.

Middle East tanker owners are keeping pace with several changes affecting fleet complements. In recent years the rise of regional fleets has been substantial, with the majority of acquisitions being high-technical-grade newbuildings. More orders are under negotiation. Faced with their own problems, the oil majors have considered moves to adapt to changing markets in VLCC trades. This has been prompted by the increasing success of shale oil exports from the US, where in 2018 crude production will reach around 10 million bpd. It already stands at 9.31 million bpd.

The market was taken by surprise when Saudi Arabia’s Bahri Navigation reached agreement with Shell

The market was taken by surprise when Saudi Arabia’s Bahri Navigation reached agreement with Shell to form an alliance for west-east cargoes from the US in order to capitalise on the Shale oil boom. Only recently were VLCC berthings tested in Texas alongside shore terminals, alleviating the need for offshore transfers.

Bahri is in the middle of a newbuilding programme that will eventually see its directly owned VLCC fleet increase to 46 vessels by the end of 2018. Hyundai Mokpo recently delivered the thirty-eighth VLCC, Maharah, into the fleet, to be followed by three more this year (the balance will be delivered in 2018). The owner has a longstanding relationship with Hyundai, which hase built 26 vessels to date. Bahri is the world’s leading owner and operator of VLCCs, and is determined to be the premier owner in ownership and logistics in the crude business. The company sees fleet development as critical in combatting low spot-market rates. Both Bahri and Hyundai have collaborated to shape newbuilding and fleet addition strategy, and more orders are under discussion for Bahri Oil, which is one of the company’s six business units. The agreement with Shell International will see it control the Saudi owner’s huge shipments of crude from east to west, while Bahri will undertake management of Shell’s growing business for shale oil from the US. The energy major appears to be consolidating, and indicated this may not be a one-off move as consolidation dictates policy in the current climate. More third-party moves are likely. Bahri and Shell will now be the biggest players in west-east movements of shale oil.

Competition among regional players is dictating changes to business administration

Competition among regional players is dictating changes to business administration. Muscat-based Oman Shipping is pursuing a development path to consolidate and compete better. The owner has a mixed fleet of 50 ships comprising tankers, gas carriers and bulk carriers. Most are locked into long-term charters, but management wants to see more activity in other areas of the market and the securing of more charter business. Only six of its 50-vessel combined fleet are involved in joint ventures, with the remainder fully owned. Oman Shipping owns 15 VLCCs, which it brought under in-house commercial management early in 2017 after withdrawing from the Navig8 VL8 pool. Before then, Oman did not possess the expertise to manage its VLCCs. The fleet will operate on the spot market. Having launched its own VLCC chartering business, the company is likely to charter in third-party-owned vessels when exigencies of trade demand. Once again, Shell International is on the scene, entering into a three-year bridging COA period until the company’s chartering arm is confident of full control. All 15 VLCCs now have secure employment, which is market linked. This deal echoes a tie up with Shell for 10 MR2 46,000 dwt product carriers that are chartered over a seven-year period, but with technical management remaining in the hands of Oman Shipping.

Other owners have contributed product carriers in what is known as Shell’s Project Silver scheme. Two ethanol carriers are now under the full ownership of Oman Shipping, having originally been ordered on a joint basis with Emirates Trading Agency, Dubai (which later withdrew). Both are serving 15-year charters to Oman Methanol Co. Another joint ownership project is with Mitsui OSK for two LR2 product carriers, with operational control by the Japanese owner. Oman Oil Co and Kuwait Petroleum International are collaborating in a project to build a new refinery that will produce 230,000 barrels of refined products per day. Commissioning is due by the end of 2020. Oman Shipping is discussing providing MR2 and even LR2 product carriers to load cargoes from the new refinery that will be built in Duqm as part of a new port development and industrial zone.

Middle East owners are committed to a moderate number of newbuildings

Middle East owners are committed to a moderate number of newbuildings totalling 32 tankers. The re-entry of Iran following the lifting of sanctions sees orders for six MR2 49,000 dwt product carriers (for delivery in 2019) committed to Hyundai. There are still subjects to be cleared before the deal can be considered firm, although IMO numbers are allocated. More NITC orders are in the pipeline, including two plus optional two VLCCs, but funding is a problem. When the ships are delivered existing fleet units will be recycled. Many vessels have been idle since the imposition of sanctions, so many are in a poor state.

Kuwait Oil Tanker Co is poised to call for another fleet renewal tender (the last round of ordering was tendered six years ago). This time is will covers two VLCCs and three LPG carriers. South Korean builders are likely to gain these prestigious high-technical-specification contracts with a deal due to be signed in the autumn.